April 28, 2016
IRS Finalizes Change to the Adjusted Applicable Federal Rates
In the April 26, 2016 Federal Register the IRS and Treasury published
final regulations (T.D. 9763) changing the way
in which they calculate the adjusted applicable federal rates ("AFRs").
- The adjusted AFRs are used in interest imputation and original issue discount calculations
where interest on the underlying obligation is exempt from federal income tax (e.g., a tax-exempt
municipal bond). I.R.C. § 1288. In addition, the adjusted long-term AFR is used by
Internal Revenue Code section 382 in computing the limitation on utilization of net operating loss
carryovers following a corporate "change of ownership." The statutory provisions and legislative
history mandate that the "adjustment" is to reflect the yield differential arising from the exemption
from federal income taxation of interest on the obligation.
- The final regulations adopt the regulations proposed in March 2015 without substantive change.
See our March 2, 2015 Quick Take, Proposed Changes
to the Adjusted Applicable Federal Rates, for a discussion of the new computational methodology
and the rationale for its adoption.
- The final regulations apply beginning with the adjusted AFR for September 2016
determined during August 2016.
For further information please contact
Brian Wainwright (Palo Alto).
Quick Takes contain short summaries and highlights of
recent tax developments often with links to underlying material and
are not intended and cannot
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